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International Business
Prof. dr. Pieter Klaas Jagersma
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Globalization: An Introduction
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Headlines of international newspapers
“The Globalization of Markets .....” “A Global Trade War on the Way?” “Protectionist Pressures are Building .....” “Ads that celebrate the Global Product .....” “Multinationals Tackle Global Marketing .....” “Globalization: The Debate Goes on .....” “P&G’s Gamble on ‘Globalization’ .....” “Going Global in Europe .....” .....
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Globalization - What’s in a name?
A step-by-step process of international business development whereby a firm becomes increasing- ly committed to and involved in international bu- siness operations through specific products in se- lected markets
Definition depending on the level to focus on
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Globalization - What’s in a name? (2)
At a worldwide level .....
globalization refers to the growing economic in- terdependence among countries as reflected in increasing cross-border flows of goods, services, capital and know-how
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Globalization - What’s in a name? (3)
At the level of a specific country .....
globalization refers to the extent of the interlinka- ges between a country’s economy and the rest of the world
Not all countries are equally integrated into the global economy
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Globalization - What’s in a name? (4)
At the level of a specific industry .....
globalization refers to the degree to which a com- pany’s competitive position within that industry in one country is interdependent with that in another country
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Globalization - What’s in a name? (5)
At the level of a specific company .....
globalization refers to the extent to which a com- pany has expanded its revenue and asset base ac- ross countries and engages in cross-border flows of capital, goods + know-how across subsidiaries
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Conclusion
There is no universally accepted definition of glo- balization
Globalization is at the heart of the New World Economic Order
Globalization is here to stay
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Globalization in perspective
According to the World Bank, the share in world output of multinational affiliates jumped from 4,5 per cent in 1970 to 15,5 per cent in 2000
The share in manufacturing output of multinatio- nal affiliates was 18 per cent in 1992 (26 percent in 2000), up from 12 per cent in 1977
Tariffs of developing countries are set to fall from 34 per cent between 1984 and 1987 to 14 per cent in 2003
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Globalization in perspective (2)
Ratios of exports to global output were 9 per cent in 1913, 7 per cent in 1950, 11 per cent in 1973 and 16 per cent in the late 1990s
FDI flows grew at 12 percent a year between 1991 and 2002, while global exports grew at 6 per cent
In 2001, 30 per cent of total FDI went to develop- ing countries In 2001, 300.000 foreign affiliates generated US $ 10,000
billion in global sales
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Global Industries
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Global industries - What’s in a name?
Global industry =
an industry in which a competitive advantage is derived from the exploitation of scale/skills eco- nomies or comparative advantage across country boundaries within a centrally coordinated busi- ness system
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Globalization of industries is the result of three major
structural changes
Rise and equalization of incomes across the indus- trialized countries
Growth of homogenous demand patterns as reflec- ted in similarity of tastes and standards among (OECD) countries
Secular decline in trade barriers among (OECD) countries, even though selective sector-specific restrictions continue to exist
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Substantial rise and equalization of income levels across the industrialized countries
SwitzerlandU.S.A.NetherlandsJapanSingapore/Taiwan
S. Korea
Year1960 1970 2000
30
20
10
0
Source: UN National Accounts Yearbooks; OECD National Accounts
Comparativeper capita in-come ($ thou-sands)
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The convergence of income levels has resulted in similar consumption levels
and demand patterns
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The past decades have witnessed a secular decline in trade barriers
Barrier Trends Examples
Trade restrictions GATT negotiations Particularly effective among developed nations Preferential pur- Gradual relaxation For example, telecommunications market chasing policies and opening up of government markets Local content Continues to be im- Mexico and India have adopted more liberal policies portant; though most foreign investment regulations governments under- stand the need for companies to link their local operations as part of a global network National security Continues to be in- Greater willingness on part of countries such as policies voked as reason for France to accept participation of foreign firms protection in high tech and defense projects
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Examples of non-tariff (trade) barriers
Voluntary export restraints Subsidies
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Increasing interdependence among countries is
evident
Exports are increasing in importance .....
Exports as a percent of GDP (in EU, Japan and U.S.):
15 percent (in 1965) > 31 percent (in 2002)
Source: OECD National Accounts
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World business is and will continue to be characterized by .....
Increasing interdependence among countries via trade and foreign direct investment (inter-industry trade/FDI)
Increasing interdependence and interpenetration within the same industry across countries (intra- industry trade/FDI)
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FDI/Cross-border direct investment is a key feature
of global competition in many industries
Automobiles Aircraft Telecommunications Banking Management Consultancy Business Schools
From Goods toServices
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Foreign direct investments (FDI) nature changed:
Typology
Global expansion vehicles 1970 1980 1990 1995 ‘00
Greenfield investments 89% 66% 47% 35% 21%
M&A 4% 25% 32% 36% 37%
Cooperative agreements 7% 9% 21% 29% 42%
Number of international expansions (European firms)
Source: Jagersma (2001)
Major increase in global M&A and (especially) global alliances
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Japanese companies took the lead in globalizing industries
Share of world trade gained/lost 1970-1995
Global/emerging industries US Japan BRD
Motor vehicles lost (2%) won (20) lost (5) Machines, nonelectronic won (3) won (5) lost (10) Aircraft won (10) won (5) lost (5) Power machinery (nonelectric) lost (15) won (2) won (5) Office machines lost (5) won (18) lost (2) Automatic data processing lost (15) won (30) lost (5) Machinery for specialized industries won (20) won (20) lost (17) Telecommunications equipment won (5) won (8) lost (12) Electrical power machinery won (2) won (11) lost (12)
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Share of world trade gained/lost 1970-1995 (2)
Global/emerging industries US Japan BRD
Sound recorders, phonographs lost (4%) won (18) lost (14) Woven textiles, man-made lost (2) won (15) lost (4) Iron/steel lost (2) won (11) lost (2) Plastic materials lost (1) won (9) won (3) Civil engineering equipment won (2) won (12) lost (7) Metalworking machines won (3) won (7) lost (2) Transistors and valves lost (20) won (17) lost (8) Electrical machinery won (2) won (8) lost (5)
Source: UN Yearbook on International Trade Statistics (1970-1995)
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3
Global Strategy: An Introduction
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Industries can be characterized on a spectrum Sources of sustainable competitive advantage
Local >>> Emerging >>> Global
Derived from Derived from worldwide country market management of business system (integration) - Scale/skills economies - Country comparative advantage (factor costs) - Centralization of stra- tegy and decentralization of stages of business sys- tem as economies and ef- ficiency dictate
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Characteristics of industries
Local Global
Product market Wide variation in customer Homogenous buyer preferences preferences, standards worldwide Economics Limited scale/high adap- Large scale/low adap- tation costs tation costs Competition Major competitors are lo- Major competitors are cal competitors in each global even though country they may be weak in a particular country World consists of ...Largely separate markets Linked markets
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Characteristics of industries (2)
Local Global
Role of global Competing globally Competing globally strategy optional vital
KFS Success comes from res- Competitive advanta- ponding to local conditions ge comes from global centralization/coordi- nation
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Examples of local, emerging and global industries
Local Emerging Global
Cement Medical equipment Automobiles Brewing Scientific instruments Computers Soaps, detergents Optical goods Construction mach. Food processing Plastic materials Agricultural mach. Travel goods Measuring devices Pharmaceuticals Retailing Specialized machinery Television Housing Aircraft HR consultancy Strategic consultancy Retail banking Wholesale banking Investment banking et cetera
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Global Businessmodels
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Globalization of business enhances need to change
Multi-national approach >> Global/integrated approach (business units are stand- (business units are inter-
alone activities) linked activities)
Economies of scale (output)Economies of scope (input)Economies of skills
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In many industries, competing globally is imperative
Industries Global competitors Non-global casualties
Aircraft Boeing, Airbus Lockheed, MDD Construction Caterpillar, Komatsu International Harvester equipment Autos Toyota, Ford, GM, VW British Leyland, DAF, Lada Semiconduc- Intel, NEC, Fujitsu tors Computers IBM, HP, Dell, Apple ICL, Tulip Pharma Merck, Novartis (almost Lots of small players all large players) Consumer Sony, Philips, Sharp, Grundig, AEG, RCA electronics Matsushita, B&O
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Global strategy requirements of competing glo- bally differs from country-centered competi- tion (in multi-market industries/segments)
Country-centered strategy Global strategy (multi-market industries) (global markets/industries)
Portfolio of country subsidiaries Coordinated global system
Subsidiaries largely independent; evalua- Subsidiaries dependent on other ted as profit centers on local results units; evaluated on basis of con- (Deloitte&Touche) tribution to worldwide system
Competitive position based on in-country Competitiveness based both on factors; subsidiaries may follow varied systemwide strengths and in- strategies (KPMG) country factors; subsidiaries have roles within system
Power and authority are weighted towards Power and authority are shared country managers authority (PWC) among managers of business units and country managers
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Globalization: A Dynamic Process
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Industries take three basic routes to globalization
The traditional path of becoming global when mature: evolution
Major discontinuities or innovation: revolution “Born global”
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Evolution paths1 = automobiles, color TV, construction equipment (evolution examples)2 = software, telecommunications (major discontinuities or innovation examples)3 = pharmaceuticals, large aircraft, robotics, large computers (born global examples)
Industries .....Source of
competitive advantage
Domestic Emerging/Multimarket Global
R&D
Manufac-turing
Marketingand distri-bution
1
3
2 3
1
Source: Jagersma (2000)
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Main characteristic of market structure evolution during globalization: greater concentration (example: autoindustry)
1920 1995
+/- 255 players
+/- 25 players
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..... and also a decline in average profitability
In percent
20
5
1950 1995
4,5 percent in 1995
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Implications for Global Strategy
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The essence of global strategy involves a firm’s deciding where
and how to perform each business system element
Each element of the industry chain has its own globalization logic (or not!!)
Three kinds of design configurations are possible for each business system element
Centralized activities: ‘centralized’ strategy Central coordination of geographically dispersed activities: ‘inter-
linked’ strategy Decentralized (differentiated) activities in each country: ‘stand-
alone’ strategy
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Globalization may take different approaches in each stage of the
business system: Global R&D
Approach Rationale Example
One central location - Economies of scale Boeing aerospace labs in R&D in Seattle - Likely in country with clear lead in techno- logical infrastructure
Centrally coordinated, - Take advantage of unique Pharmaceutical compa- multiple locations skills or strengths avai- nies around the world lable in different country locations - Specialize labs by different products/technologies
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Globalization may take different approaches in each stage of the business system: Global R&D
(2)
Approach Rationale Example
Same R&D in multiple - Draw on multiple scien- IBM (basic research locations tific perspectives on same labs in U.S. and Europe) problem - Avoid risk of being tied down to one approach
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Generic Global Businessmodels
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Global businessmodelsSource: Jagersma (2000)
Business profitability in one country independent of another
Profitability in one country depends on operations in other countries
Country Global niche
Regional Transnat.
National
Scope ofoptimumbusinesssystem
Global
High Low
Extent of local adaptation
Stand-alone
businesssystems
Singleregional/
worldwidebusinesssystems
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Winners in Global Industries Play a Global Game
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Many companies have to cope with these challenges .....
Actualstrategy
Country
Regional
Transnatio- nal
Country Regional Transnational
Required strategy
UnileverGENestleIKEA
IBM
Olivetti
Philips[Siemens]Chrysler
XeroxFord
BoeingCaterpillarToyotaSonyDaimler-Benz
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Nature of global strategy challenge depends on the extent of misfit
Actualstrategy
Country
Regional
Transnational
Country Regional Transnational
Required strategy
Fundamental restructuringof business system
Significant investment andorganizational realignment
Difficult transition
Requires readaptation ofbusiness system and or-
ganizationIf not feasible, seek part-
nerships
Global strategy fit
Global strategy fit
Global strategy fitDecentralize, permitlocal differentiation
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Take Aways
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Take aways
World has entered a new era of global competition; funda- mental environmental forces (.....) will continue this deve- lopment
Winners in this/the next decade will be those with skills + fin. resources to play a global game; companies unable to attain global leadership must also adapt to minimize their disadvantages (.....)
There is no one pattern of global competition nor one type of global businessmodel (.....)
Globalization is here to stay: people want the best goods/ services, whatever their origin. Along with the right to vote they want the right to buy (.....)
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International Success = Will + Skill
Thrill